From the start of commercial exploitation of petroleum in 1859 to roughly the year 2000, the inflation-adjusted (to year 2000) price of oil averaged roughly $20 per barrel in most years. A barrel of oil contains the energy equivalent of roughly 23,000 hours of human labor, so $20 per barrel translated to a minuscule energy cost as compared to the cost of the energy sources (principally, human and animal muscle-power) that had built the pre-20th-century agrarian world. The industrial cities of today were founded on ultra-cheap fossil energy. Parking lots were paved, bridges spanned, suburbs and highways constructed—all with a principal fuel source that cost only an insignificant fraction of the cost of human labor.

During the past decade, the yearly average price of oil has jumped to over $100 per barrel. Global annually averaged crude oil prices doubled from $25 in 2002 to $55 in 2005, and then doubled again, from $55 in 2005 to $111 in 2011. The energy of oil is still cheap when compared to the cost of human labor, but it has increased roughly 500% in comparison to its price during the 20th century, the heyday of industrial expansion. We are still wealthy compared to our ancestors; we still enjoy the benefits of cheap energy. Yet now, paving parking lots, spanning bridges, and constructing suburbs and highways costs significantly more than it did previously.

Alternative, renewable energy sources have the potential to replace oil in some applications. Still, the inevitable energy transition away from fossil fuels will take enormous investments, and it will also take time—three or four decades in the best case. It is therefore highly unlikely that society will make sufficient investment, in sufficient time, to avert a steep decline in available energy and a steep increase in energy costs during the coming decades.

The economy can adjust to higher energy prices over time, but that adjustment process may be painful. Since replacing oil with other energy sources will be difficult, and since oil is so pivotal to world trade, the decline of oil will probably ensure the commencement of a historic period of economic contraction—in some respects, a mirror image of the 20th century’s unprecedented boom.9 And that’s a fair interpretation of what we are beginning to see take place around us. Economic weakness plagues the world’s industrialized nations. Efforts to extract “extreme” fossil fuels have taken on an air of desperation. The oil-rich Middle East is in turmoil, with major world powers seeking either to buy influence with rulers or to gain control of resources by destabilizing regimes. Paradoxically, while labor productivity rose during the era of ultra-cheap energy as workers used powered machines to accomplish more tasks, rising energy costs now translate to higher unemployment and downward pressure on wages.

Much of our current economic dilemma has to do with debt—and this in turn also relates to the underlying energy problem. As American economist Robert Gordon has documented, cheap oil and electrification drove rapid economic growth during the mid-20th century.[10] By the 1970s, the expansion of oil- and electricity-based infrastructure was reaching a point of diminishing returns in terms of its ability to keep the economy expanding: most families already had a car or two, as well as a houseful of electric appliances and gadgets. As globalization took hold, American factory workers found themselves competing with workers in poorer nations, and real hourly wages stopped growing. With demand stagnating, new ways had to be found to keep the engine of economic growth humming. Since the 1970s, growth in consumption has been maintained to an ever-greater degree simply by borrowing, with rising consumer debt as a significant driver of commerce. During this period in the United States, debt (all debt, not just government debt) rose at three times the rate of GDP growth. As debt ballooned, the financial industry increased in size relative to manufacturing, agriculture, and the other components of the economy. The financial industry then began blowing bubbles as a way of increasing profits. The most recent of these was the US housing bubble, whose collapse in 2007–2008 left us where we are now. The end of the era of cheap oil and the inflation and collapse of history’s biggest debt bubble are historically intertwined.

With energy literacy, an understanding of energy history, and a peak-oil-informed perspective, current economic and geopolitical events become much more readily understandable—if no less causes for concern.

This passage above dovetails with yesterday's post which was an excerpt of Robert Ayres and Benjamin Warr's excellent book, "The Economic Growth Engine: How Energy and Work Drive Material Prosperity"